Fortune With a Stellar Probe into J&J

Now playing in Fortune, a honey of a probe into pharma icon Johnson & Johnson. Written by Mina Kimes, it is a virtual case study in the deterioration of a once-exemplary corporate culture and one of the better-reported business stories you’ll see.

Through a relentless presentation of facts, laid one on top of the other, the piece unsparingly shows how feckless leadership allowed the company’s prized over-the-counter unit, McNeil Consumer Healthcare, to stumble into no less than eight recalls, including the biggest children’s drug recall of all time—136 million bottles of children’s Tylenol, Motrin, Benadryl, and Zyrtec potentially contaminated with dark particles—and the temporary shutdown of a big plant after a “scalding” inspection report by the FDA. McNeil’s once-elite quality assurance division—ramped up after the famous 1982 Tylenol recall—is shown to crumble under the weight of cutbacks, a disastrous reorganization, and corner-cutting, some of it, according to former employees, deliberate. It reached the point, Fortune reports, that the company hired a contractor to secretly buy up defective Motrin shipments at retail stories rather than face a public recall.

Check this out:

J&J says the FDA “was informed that McNeil would be retrieving product.” But a memo written by one of the contractors (and released by Towns’ committee) seems unambiguous: “You should simply ‘act’ like a regular customer while making these purchases. THERE MUST BE NO MENTION OF THIS BEING A RECALL OF THE PRODUCT!” (Emphasis in the original.)

How about that?

Worse, executives still won’t own up to the extent of the problems. Here’s Fortune’s tart summary of recent Congressional testimony by McNeil head Colleen Goggins:

Goggins apologized to “the mothers, the fathers, and the caregivers for the concern and inconvenience caused by the recall.” She then spent most of her sworn testimony downplaying the situation. “Unfortunately there has been some confusion in the media with respect to this recall,” she went on, stressing that the recalled drugs have not been shown to cause illness.

Goggins’s approach — one part apology and promise to do better to three parts disclaimer and evasion — embodies J&J’s recipe for addressing the crisis.

CEO Bill Weldon, meanwhile, is described as “largely invisible.”

Though the story doesn’t say so explicitly, a key source appears to have been the Food and Drug Administration, whose records and inspection reports provide a wealth of information, and which comes across as effective and on-the-ball. Ah, the virtuous symbiosis of investigative reporting and active regulation.

A strong point of the story is its nuance, as in this description of how McNeil’s quality culture shifted after the retirement of a key executive in 2002 (my emphasis):

With that program in place, McNeil’s quality-control department thrived for a few years. Then, not long after Larsen retired in 2002, it began to slowly weaken. The culprit was a familiar one — cost cutting — but in a subtler form. There were no wholesale layoffs in quality control. Instead experienced staffers were repeatedly laid off and replaced with newbies who mostly lacked technical pharmaceutical experience. By 2008 the analytical laboratory, formerly staffed almost entirely by full-time scientists, was half-full of contract workers, according to a former manager there.

Once stricter than a schoolmarm, the department grew lax. The team that tested the production lines was dubbed the “EZ Pass system,” according to a former quality-control employee. In one instance an engineering flaw on a line made it difficult to clean liquid-medicine bottles. Rather than find a way to fix the problem, an engineer says, the team instead tried to simply eliminate that check from the test. “They were trying to take a lot of short cuts,” she says.

Great detail.

What is also unusual is that the story manages to lay responsibility for problems directly at the feet of individual actors. Everybody is calling for accountability reporting these days. This is what it looks like. Here’s a passage on McNeil’s quality chief hired in 2004.

That year the company hired a new head of quality, Bob Miller, an ex-Pfizer staffer described as sharp and ambitious by former co-workers. Miller in turn hired some of his old colleagues. The tight-knit crew, who took their meals together and lived part-time in a house near the factory, according to former employees, had the collective know-how to fix the plant.

But that’s not what happened. One day in 2005 a batch of more than 1 million bottles of St. Joseph aspirin failed a quality test because a sample didn’t dissolve properly, according to two employees involved in the testing process. Following company procedures, the employees blocked the batch from being shipped. Their manager then called the two into his office. “He said, ‘You like working here?’” one of the workers recalls. “‘This should pass. There’s no reason this should fail.’” Ultimately the two quality workers were ordered to retest the drugs, then average the new scores to arrive at a passing grade so that the pills could ship. Says one of them: “You get to the point where, like me, you end up doing what you’re told.”

The piece goes beyond even individual agency to point to structural issues, including J&J’s “disastrous” decision to move McNeil from its heavily regulated pharmaceutical division to its consumer products division after buying a similar division from Pfizer in 2006.

We’ve been accused for falling into a simplistic good-guys-vs.-bad-guys construction when it comes to the financial crisis. But as I was saying the other day, it’s not necessary to choose between probing individuals and examining structural issues. You can and should look at both.

Here’s a look at the effect of cutbacks on the factory floor:

According to tax records filed with Whitemarsh Township, where Fort Washington is located, McNeil’s workforce in the township was slashed by about 32% between 2005 and 2009. The biggest cuts, employees say, occurred on the factory floor. As the production staff shrank and equipment budgets were slashed, more and more mistakes began to pop up. Gaskets blew, metal punches broke, processes failed. “Those guys were getting worked a lot. They were always understaffed, always behind schedule,” says a former quality employee. “They had about 10 things to do, and two people to do it.”

“The whole dynamic was very stressful,” she adds. “It wasn’t Do your job the right way, it was Do your job fast. Make it look good, and get it done as fast as possible.”

I didn’t even know local tax records had employment data.

We’ve hadourissues with Fortune lately, mostly for seeming out of touch during a time of severe economic distress and no small amount of corporate wrongdoing, so it’s a pleasure to give credit where it’s surely due. These kinds corporate probes are rare and getting rarer. Readers should appreciate them when they come along.

Update: 5:25 p.m.: Another J&J recall today. This time, the Times says, a different unit is recalling two hip replacement implants “because many patients required a second hip replacement after the company’s implants failed.” Each recall makes Fortune’s piece that much more timely.

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